TaxTMI 
TaxTMI 
2025 (8) TMI 1046
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....upheld. The Assessing Officer has determined the gross annual letting value of the property under the provisions of Section 23(1)(a) of the Act at Rs. 22,00,000/- and has subjected the same to tax under Section 22 of the Act. The Assessee insists that the annual rateable value determined under the municipal laws could at best be treated as the sum for which the property might have reasonably be expected to be let under the provisions of Section 23(1)(a) of the Act. 2) Brief factual background of the case is as under : The Assessee purchased office premises bearing No.72 admeasuring 3275 sq.ft. on 7th floor of the building 'Sakhar Bhavan' at Nariman Point, Mumbai for consideration of Rs. 21,85,664/-, which is the value reflected in the Fixed Asset Schedule in the Assessee's Balance Sheet. On 29 November 1988, the Assessee entered into Leave and License Agreement and other connected agreements with Citi Bank for letting out the office premises for a period of 10 years from 1 April 1989 to 31 March 1999. The agreed license fees were Rs. 9,825/- per month. Citi Bank paid interest free security deposit of Rs. 1,54,00,000/- to the Assessee. For the year ending 31 March 1990 (....
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.... provisions of Section 23(1)(a) of the Act are relevant and the enquiry into the sum for which the property might reasonably be expected to be let out has to be determined with reference to the municipal rateable value. That the amount of interest free security deposit received by the Assessee has no relevance for determination of the gross annual letting value either under Clauses (a) or (b) of sub-section (1) of Section 23 of the Act. That the sum for which the property might reasonably be expected to be let from year to year must be determined with reference to the rateable value. That the issue is squarely covered by the judgment of this Court in Commissioner of Income-tax-12 Versus. Tip Top Typography [2014] 368 ITR 330 (Bombay) which also holds that the sum to be determined under the provisions of Section 23(1)(a) and cannot exceed the standard rent in respect of the property determinable as per the Rent Control Legislation. That the Income Tax Appellate Tribunal has grossly erred in considering usufruct obtainable from security deposit as rent of the property. The usufruct of deposit is nothing but an addition made under Section 23(1)(b) which is impermissible in law. That i....
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....ions, Mr. Joshi would pray for setting aside the orders passed by the Assessing Officer, CIT(A) and ITAT. 8) The Appeals are opposed by Dr. Krishnaiyer, the learned counsel appearing for the Revenue. She would submit that the Assessee had smartly divided the rental return receivable by fixing a nominal amount towards license fees and hefty security deposit of Rs.1.54 crores. That the license fees indicated in the agreement constituted only the monthly outgoings in respect of the premises and the real return to the Assessee was in the form of security deposit of Rs.1.54 crores. That the Revenue is not bound to accept the municipal rateable value which is the principle recognized by this Court in its judgment in Tip Top Typography. That in the present case, as per the Asesseee's own case, the municipal rateable value was ridiculously low at Rs. 10,200/- and that therefore the Assessing Officer was entitled to consider the comparable instances. That in the instant case, the Assessing Officer has considered comparable instance of the same licencee (Citi Bank) paying license fees in respect of the premises in the same building. That the Assessing Officer has made a detailed analysis ....
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....e relevant time and the Licensor had agreed to bear the same only to the extent of Rs. 9,825/- per month. It was agreed that in the event of any increase of such taxes and income beyond Rs. 9,825/-, the same was to be borne by the Licensee. The arrangement therefore creates an impression that the amount of Rs. 9,825/- agreed to be paid as license fees by Citi Bank to the Assessee was actually the amount of taxes and municipal outgoings. Citi Bank paid to the Licensor an amount of Rs. 1,54,00,000/- towards interest free security deposit which the Assessee was entitled to retain and enjoy during currency of license for 10 years and to refund the same to Citi Bank without any interest. It however appears that the transaction of payment of security deposit of Rs.1.54 crores was recorded by way of separate agreement executed on the same day i.e. 29 November 1988. The case thus involves letting of premises on a nominal amount of license fees while accepting hefty amount of security deposit. 12) In the return of income for the relevant Assessment years, the Assessee offered rental income of only Rs. 1,17,900/- calculated by taking into consideration only the amount of license fees of R....
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....ssessing Officer needs to conduct an enquiry and determine the annual value for which the property might reasonably be expected to let, whether or not the same is actually let. However, in a case where the property is actually let and the annual rent received or receivable by the owner is in excess of the sum determinable under clause-(a), the actual sum so received/receivable becomes the annual value of the property for the purposes of Section 22 of the Act. 14) In the instant case, the Assessing Officer refused to accept the license fees indicated in the licence agreement as the annual value of the property for taxation under Sections 22 and 23 of the Act. Instead, he embarked upon an enquiry for deciding the annual value of the property. He adopted twin methods for such determination. Firstly, he took into account the comparable instances and secondly, he also took into consideration the interest which the assessee would have paid to the bank if he was to take overdraft facility of Rs, 1.54 crores which it accepted as security deposit. The Assessing Officer thereafter considered the annual value of the property at Rs. 22,00,000/. It would be apposite to exact the findings rec....
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....as maintained by Citi Bank with the Assessee and the Assessee had contemporaneously availed overdraft facility from Citi Bank for which it was paying to the Citi Bank, interest @ 15% p.a. The Assessing Officer therefore worked out figure of Rs.23,10,000/- as 15% return of security deposit of Rs.1.54 crores. After considering the two figures of Rs. 19,65,000/- (based on comparable instances) and Rs.23,10,000/- (based on 15% return on security deposit), the Assessing Officer arrived at figure of Rs. 22,00,000/- by treating the same as gross annual letting value of the property. 17) Mr. Joshi has strongly objected to the course of action adopted by the Assessing Officer by determining 15% notional income as the gross annual letting value of the property. It is submitted that the practice of determining notional interest on security deposit as gross annual letting value of the property has been repeatedly criticized by several Courts. Our attention is invited to the relevant observations made by the Division Bench of this Court in Tip Top Typography (supra) wherein this Court has dealt with twin issues of (i) permissibility to consider notional interest on security deposit as annual....
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....y might fetch. Thus, if he finds that the actual rent received is less than the 'fair/market rent' because of the reason that the assessee has received abnormally high interest-free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest-free security can be taken as determinative factor to arrive at a 'fair rent'. The provisions of section 23(1)(a) do not mandate this. The Division Bench in Asian Hotels Ltd. (2010) 323 ITR 490 (Delhi), thus, rightly observed that in a taxing statute it would be unsafe for the court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case of CIT v. J. K. Investors (Bombay) Ltd. (2001) 248 ITR 723 (Bom) categorically rejected the formula of addition of notional interest while determining the 'fair rent'.. . It is, thus, manifest that various courts have held a consistent view that notional interest cannot form....
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....s not determined the gross annual rateable value of the property at Rs. 22,00,000/- only on the basis of notional interest on security deposit. He has also taken into consideration the comparable instance of letting out property in the same building to the same licensee (Citi Bank) while making an enquiry under the provisions of Section 23 of the Act. Here, the second issue decided in Tip Top Typography comes into play as the Assessee contends that the municipal annual ratable value alone can be taken into consideration for the purpose of determining annual value of the property under Section 23(1)(a) of the Act. Strenuous reliance here is placed on judgment of Division Bench in Tip Top Typography. While deciding the first issue of permissibility to consider notional interest on security deposit, we have also made reference to the Full Bench decision of the Delhi High Court in CIT Vs. Moni Kumar Subba which has also decided the issue of consideration of rateable value determined under municipal law for determining the annual rateable value under Section 23(1)(a) of the Act. Full Bench of the Delhi High Court formulated following question for consideration:- The next questi....
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....ng lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship and such other considerations may take it out of the bounds of reasonableness.' Thus, the rateable value, if correctly determined, under the municipal laws can be taken as annual letting value under section 23(1)(a) of the Act. To that extent we agree with the contention of the learned counsel of the assessee. However, we make it clear that rateable value is not binding on the Assessing Officer. If the Assessing Officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/evidence placed on record. This view is fortified by the decision of the Patna High Court in the case of Kashi Prasad Kataruka v. CIT (1975) 101 ITR 810 (Patna). The above discussion leads to the following conclusions: (i) Annual letting value would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances. (ii) ....
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....e again having respectfully concurred with the judgment of the Full Bench of the Delhi High Court, we need not say anything more on this issue. 23) In our view, both the Full Bench of the Delhi High Court in CIT Versus. Moni Kumar Subba as well as the Division Bench of this Court in Tip Top Typography have held that in ordinary circumstances, the only value fixed by the municipal authorities can be a rational yardstick and the rateable value so determined under the Municipal laws can be taken as annual value of the property under Section 23(1)(a) of the Act. However, this principle applies only when the annual value so determined under the municipal laws has close proximity with the assessment year in question in respect of which the assessment is to be made under the Income Tax laws. If there is a change in the circumstance because of passage of time, for instance where the annual value was fixed by the municipal authorities long back on account of basis of rent then received, such municipal annual value does not provide a safe yardstick for determining annual value of the property under Section 23 of the Act. The Full Bench of the Delhi High Court specifically recognizes the p....
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....g Officer, on his own enquiry, finds out that the gap between the municipal rateable value and the annual rent of the property is likely to fetch in not too wide, the Assessing Officer can consider the annual value of the property corresponding to the municipal rateable value. However, the moment the Assessing Officer notices that the gap between the two amounts is wide, he cannot be compelled to accept the municipal rateable value for the purpose of Section 23 of the Act. Thus, the principle of accepting municipal rateable value for the purpose of Section 23 of the Act cannot be uniformly applied to every case and there is no bar for the Assessing Officer from making an independent enquiry under Section 23(1)(a) and determine the sum which he believes is likely to be fetched as rent in respect of the property in question. 25) In the present case, the Assessee did not, in the first place, present before the Assessing Officer the municipal rateable value right till the proceedings were decided by the CIT(A). No document was produced by the Assessee to indicate a particular amount being fixed as municipal rateable value. In fact, it was never his case that the amount fixed towards....
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....Corporation in respect of the office premises was Rs.67,331/- per year. The Certificate is silent about the date of fixation of such rateable value. There is no underlying material to indicate as to how the society had arrived at the said figure. 27) Though the Assessee attempted to rely upon developer's letter and Society's Certificate before the ITAT, its Counsel ultimately conceded that both documents be ignored. In this regard, para-8 of the order of the ITAT reads thus :- 8. According to Shri Dastur, the rateable value of the premises, which comprised area of 255 sq.mts, was only Rs. 10,200/-. So, as per section 23(1)(a) of the Act, its value is to be adopted at Rs. 10,200/-. This was on the basis of a letter given by Aesthetic Builders Private Limited, appended at Page 60 of the Paper Book. In the Paper Book at Page 59, one certificate from Sakhar Bhavan Premises Co-operative Society Limited (Proposed) dated 28.11.1995 was appended, wherein the valuation of premises No.702 at Sakhar Bhavan was stated to be Rs.67,331/- per year. In the certificate given along with the Paper Book, it was stated that this evidence was available before the CIT(A). The CIT (A) did pass....
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....sessing Officer has to undertake the exercise contemplated by the rent control legislation for fixation of standard rent. The attempt by the Assessing Officer to override the rent control legislation and when it balances the rights between the parties has rightly been interfered with in the given case by the appellate authority. The Assessing Officer either must undertake the exercise to fix the standard rent himself and in terms of the Maharashtra Rent Control Act, 1999, if the same is applicable or leave the parties to have it determined by the court or tribunal under that Act. Until, then, he may not be justified in applying any other formula or method and determine the "fair rent" by abiding with the same. If he desires to undertake the determination himself, he will have to go by the Maharashtra Rent Control Act, 1999. Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary thereto can be made by the Assessing Officer. Once again having respectfully concurred with the judgment of the Full Bench of the Delhi High Court, we need not say anything more on this issue. 32) In our view, the contention of fixation of annual ....
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....lue under Section 23 needs to be determined on the basis of standard rent merits outright rejection. 35) Once it is held that the Assessing Officer is not bound to accept the municipal rateable value and that in a given case, he can take into consideration the annual rent the premises are capable of fetching, we do not see any error on the part of the Assessing Officer in conducting enquiry and fixing Rs. 22,00,000/- as the annual rental value of the premises. The Assessing Officer has taken into consideration the license fees paid by Citi Bank in respect of the other premises in the same building in the year 1983 and has marginally increased the rent of Rs. 43/- paid by Citi Bank in the year 1983 to Rs. 50/- in respect of the year 1989-90. The contention about impermissibility to consider rent of ground floor premises for fixing the annual value of seventh floor premises does not merit consideration. Even if it is assumed that ground floor premises are likely to fetch more rent, there was also a long gap of six to seven years between the instance taken into consideration by the Assessing Officer and the license agreement executed between the Assessee and Citi Bank. If yearly in....